Financial returns from Level 4 emergent leadership

October 15, 2014

Does an empowering leadership style, aimed at getting the best out of all the people employed, get the best business returns? In many ways, it is an illogical question to ask. It makes perfect sense that engaging people across the organisation with strong leadership is always going to create the strongest asset of any company.

In business, however, the legacy of a ‘command and control’ system still encourages some executives to view people as mere ‘resources’, and to downplay the importance of empowering and energising the people who ultimately will create the value.

Others sense that there is some value in engagement, but delegate the task to the HR department. What the research now shows is that the best business results are achieved when leaders fully engage the whole workforce; and that this approach often requires a new mindset and culture, as well as tactics and initiatives.

Anyone unfamiliar with the evidence base for the business benefits of enlightened leadership of people might be surprised at just how extensive it is. There are certainly hundreds, probably thousands of research papers, that consistently show the link, and it has been building strongly and consistently over the past 20 years.

Many employers that have made the investment have been surprised at how large the multiple business benefits are: better profits, lower staff turnover, better customer retention, enhanced brand reputation, lower marketing costs and so on, as multiple virtuous circles are created.

A significant body of literature demonstrating these links began to appear in the 1990s, most prominently chronicled by the US-based academic Jeffrey Pfeffer. In an article in 1999[1] he referred to ‘a substantial and rapidly expanding body of evidence, some of it quite methodologically sophisticated, that speaks to the strong connection between how firms manage their people and the economic results achieved’. One study of high-performance work practices he cited showed that a one standard deviation increase in such practices yielded $27,044 more in sales, $18,641 in market value and $3,814 in profits.

More recently, a study by Raj Sisodia, David Wolfe and Jac Sheth for their book ‘Firms of Endearment‘, (FoEs) involved a study of the financial performance of 30 companies defined as those that that focused on passion and purpose, bringing the interests of all stakeholders into strategic alignment. These companies returned 1,184% for investors over the ten-year period of the study, to end June 2006, compared with 122% for the S&P 500. They have also updated the data to cover a 15-year period between 1996 and 2011. In that period, FoEs outperformed S&P 500 index by a factor of 10.5.

An analysis of the performance of Fortune’s ‘100 Best Companies to Work For’ where criteria used include trust, pride and camaraderie – creating a genuine sense of satisfaction amongst employees, reveals that between 1997 and 2011 these companies had three times higher stock market returns than S&P 500 companies[i].

A paper I co-authored chronicled in some depth the cases of employers that realised huge commercial gains from participative leadership reforms, moving towards Level 4 on the Emergent Leadership model. In the case of CSC Germany, it had initially responded to its stuttering performance by tightening command and control, only to see performance deteriorate further. This could have become a vicious circle, but instead there was investment in improving the culture. Three months later, performance improved. For the first year of the new leadership paradigm, profit margin target achievement was 151%, and for the next year 238%[i].

In another paper, we observe how:

‘Leadership is not really about delegating tasks and monitoring results; it is about imbuing the entire workforce with a sense of responsibility for the business.’[ii]

The objection ‘Show me the evidence’ for enlightened, participative business leadership has always been illogical, but now it is dated also. But of course to find the evidence, you have to want to look for it.